Europe close: Banks dragged lower by slump in government bond yields

European stocks dropped as renewed declines in sovereign bond yields weighed on lenders’ shares.

The benchmark pan-European DJ Stoxx 600 closed the session 2.44% or 8.33 points down at 332.92, alongside steep falls of 3.62% for Italy's FTSE Mibtel and a 3.18% hit to Spain's Ibex 35.

In parallel, Germany’s Dax lost 2.52% or 254.25 points to close at 9,834.62 and the French Cac-40 retreated 2.24% or 98.89 points to finish the session at 4,306.72.

Banks fared worst, with the Stoxx 600 gauge of Bank shares closing down by 3.57% or 5.18 points at 139.87.

A stronger dollar also took its toll on oil&gas and mining stocks, with crude prices under pressure.

Brent crude oil was last down 2.5% at $50.71 per barrel and West Texas Intermediate lost 2.68% to trade at $49.24 on the ICE.

Investors appeared to be rushing to the safety of bonds as global yields hit record lows and prices continued to rally.

Yields on the benchmark 10-year German Bund were down at 0.030%, recovering slightly from a new record low of 0.021% earlier in the session. Similarly-dated Gilts and Japanese JGBs also saw their yields hit fresh record lows.

The European Central Bank began a programme of corporate bond purchasing on Wednesday, though bank bonds were explicitly excluded.

“In the eurozone, investors step out of the equity markets to invest in the corporate bond debt at a visible pace,” said London Capital Group market analyst Ipek Ozkardeskaya in a note.

“The rush into the eurozone corporate bonds will likely cause a similar unhealthy distortion in risk-to-return ratios, as it has been the case when the European Central Bank started buying sovereign debt to boost growth.”

On the economic front, Danish inflation rose marginally in May, with consumer prices up 0.1% on a year-on-year basis.

In Norway, core inflation remained unchanged month-on-month at 0.4% in May, while Italy’s industrial production index rose 0.5% month-on-month for April, beating the 0.3% rise expected by economists.

Earlier, German consumer prices measured in EU-harmonised terms held steady in the country in May on a year-on-year basis, and rose 0.4% over the previous month.

In German national terms, inflation was 0.3% month-on-month and 0.1% higher over the same time last year.

A 7.9% fall in energy prices dragged the figures down, with Destatis reporting that inflation excluding energy was 1.2% on the year.

In France, industrial production recovered at a faster-than-anticipated rate in April, with Insee revealing growth of 1.2% on a monthly basis, against a 0.4% decrease in March and a forecast increase of 0.4%.

It was the first rise in the country for three months, with manufacturing output ahead by 1.3%, from a 1% decrease, though construction output eased to 0.7% from 1.3%.

Finnish industrial production was also released in the morning, with a working-day-adjusted 2.1% year-on-year increase in April showing a bounce back from the 1.8% decline seen in March.

In corporates, pubco Fuller, Smith & Turner was down 4.09% after reporting a rise in profit for the financial year, though it warned of a mixed start to the current year.

Pretax profit for the year to 28 March grew to £39.2m from £36.1m a year ago, with revenue rising to £350.5m from £321.5m.

Recruitment firm SThree lost 7.16%, reporting mixed trading conditions in the six months to 31 May, with group gross profit up 6% year-on-year and ahead by 11% excluding energy.

Its UK market was hampered by Brexit uncertainties and a slowdown in the banking and finance sector, with gross profit there down by 5% on-year, and seriously challenging conditions in energy, with gross profit down 31%.

SAS Scandinavian Airlines was down 10.31% after it managed to avoid a Norwegian pilot strike, by signing a new wage agreement with the trade union Parat.

More than 400 of the firm’s pilots in Norway were due to walk out unless an agreement was found in mandatory mediation, which ended on Thursday.